Mortgage Policy Decisions – “The pressures on the Minister of Finance are to do the wrong thing.”

Whatever happens in the housing market, former central bank governor David Dodge thinks there’s a bigger issue at stake. The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years. Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations. “There are different ways one can go at that, but you don’t want it all in the hands of the Minister of Finance. Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said. Mr. Dodge also believes that the mortgage insurance system places too much emphasis on keeping banks healthy by protecting them from mortgage losses, rather than keeping the economy healthy by ensuring that housing supply is in line with demand. Looking back on that angry meeting with CMHC executives in 2006, and with the benefit of seeing what has happened to the housing market, he stands by his criticism. “I have no reason to revise what I said at the time at all. I think [loosening the rules] was a mistake,” Mr. Dodge said.

Even some former CMHC insiders are now calling for a radical rethinking of what the institution does. Gary Mooney, a former director on CMHC’s board, says “it is now time for root and branch reform,” including “an honest evaluation of CMHC’s relationship with our major financial institutions.” Private competitors – of which there are currently only two – could play a bigger role in providing mortgage insurance, he suggests.

Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks. In a recent interview with The Globe, he said he wants Ottawa to look at privatizing CMHC in the next five to 10 years. Proponents of that idea say one of the main benefits would be to reduce the taxpayer’s exposure to mortgages – and to a housing slump.

But Mr. Dodge argues that’s not really the case. Ottawa is already in too deep. “The system as a whole is too big to fail,” he says. “And when something is too big to fail, the government will come in.”

Ms. Kinsley, CMHC’s CEO, declined several interview requests from The Globe and would not comment for this article.

CMHC allowed the mis-pricing of the risk of lending capital, and this contributed to the massive speculative mania in Vancouver RE. Note how this opinion is now becoming mainstream.
By the time prices have crashed (in a year or three?) we’ll have certain individuals saying both “We all knew it was a bubble” and “Who could have possibly foreseen this?”, sometimes in the very same paragraph. Just watch.
Further point: As usual when markets go through one of these massive manias, policy rethink always happens after the fact, when the horse has long since bolted and the market is already looking after the problem.
– vreaa

He made an assumption that privatizing CMHC would create incentives to hike rates, as if it was a consequence of privatization, when in fact, an increased premium would be correcting CMHC's underpriced rates. "We want a competitive financial sector." he writes. By this he means more cheap insurance for banks who can't return to fully funding themselves with private capital.

Overpriced and Overbuilt: The Canadian Housing Market Returns to Fundamentals
TD EconomicsApril 7, 2009
Authors: Grant Bishop, Pascal Gauthier
Looking back on the boom in Canadian homebuilding from 2002 to 2008, it is now clear that unsustainable price increases drove unsustainable levels of building. This overbuilding will weigh on markets over the next years. While newly-built houses were being rapidly purchased by new homeowners during the housing boom, our view is that house prices exceeded the value of housing that was justified by fundamentals by approximately 9% nation-wide during 2004 to 2008. The steep erosion of affordability and the persistence of increases in house prices signal that speculation fuelled this inflation. In a self-fuelling spiral, expectations of higher prices were in turn driving prices even higher. This overpricing compelled a level of residential construction that exceeded its fundamental-justified level by approximately 12% during the “housing boom”. Consequently, while most markets won’t face U.S.-style overhangs, the construction of too many new homes over the boom means a deepened slump.

“Mr. Dodge believes a system should be devised to measure house prices against other benchmarks, to determine when mortgage insurance rules need to be tightened or loosened, regardless of political considerations.”
This is a good idea but the damage has already been done. Waaay too late, buddy.

“The rules that shape the housing market should not be subject to the whims of politicians, he says. Finance ministers should not be allowed to make them up on the fly, in the manner that Ottawa has over the past several years.”
Like the new $50B addition to private sector insurance like Genworth. How many times can they kick savers in the balls? This might slow down the descent of RE in 2013 a bit. Anyone disagree?

Just watched Ben’s presentation. So when, not if, this all explodes, is CMHC on the hook or is it the banks? I’ve always thought it was CMHC… got a bit confused there…

One thing that struck me in that article was the lack of any housing-related policy behind the rule changes. It was more about maintaining CMHC revenue in the face of competition, or just sweeping along in the tide of deregulation pushed by the financial lobby.

i like how Vancouver’s RE community attacks Government intervention in their housing market, but when the intervention is good for them(and bad for taxpayers) such as CMHC….they all of the sudden support Government intervention like it’s life or death

Lot’s of fun here!
“Because generally, the pressures on the Minister of Finance are to do the wrong thing,” he said.”
As opposed to other politicians? Are they generally pressured to do the right thing? Who brings the pressure? (My answer, not surprisingly, is that lots of politicians do the wrong things under pressure. Dodge is right on the money on this one).

“Mr. Flaherty has gone even further, asking whether the federal government should be in the business of guaranteeing loans for the benefit of banks.”
The answer is no, the government should not be guaranteeing loans that can get private insurance. Government should try to do less, not more.

“Ottawa is already in too deep. “The system as a whole is too big to fail,” he says. “And when something is too big to fail, the government will come in.”

Let’s hope Dodge is wrong. What he’s saying is that in the future the pressure on Flaherty to do the wrong thing will be too much, except a large part of the market in insured mortgages is already in govt. hands. They won’t need to step in because they’ll already be in.

However, saying it’s too late is like saying we can’t fix anything. If it’s inevitable its still better to fight. FWIW, I’m in support of Flaherty’s rule changes.